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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND _____________________________________

AUDITED FINANCIAL STATEMENTS _____________________________________

YEAR ENDED JUNE 30, 2017 WITH

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George L. Kennedy, III, CPA State Auditor

August 23, 2017

Members of the Board of Governors

South Carolina Medical Malpractice Patients’ Compensation Fund Columbia, South Carolina

This report on the audit of the financial statements of the South Carolina Medical Malpractice Patients’ Compensation Fund for the fiscal year ended June 30, 2017, was issued by The Brittingham Group, L.L.P., Certified Public Accountants, under contract with the South Carolina Office of the State Auditor.

If you have any questions regarding this report, please let us know. Respectfully submitted,

George L. Kennedy, III, CPA State Auditor

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND _____________________________________

AUDITED FINANCIAL STATEMENTS _____________________________________

YEAR ENDED JUNE 30, 2017 WITH

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND _____________________________________

AUDITED FINANCIAL STATEMENTS _____________________________________

YEAR ENDED JUNE 30, 2017 WITH

INDEPENDENT AUDITORS’ REPORT CONTENTS

Independent Auditors’ Report ... 1

Management’s Discussion and Analysis ... 3

Basic Financial Statements Statement of Net Position ... 9

Statement of Revenue, Expenses, and Changes in Net Position ... 10

Statement of Cash Flows ... 11

Notes to Financial Statements ... 13

Required Supplementary Information Schedule of Proportionate Share of the South Carolina Retirement System Net Pension Liabilities ... 35

Schedule of South Carolina Retirement System Contributions ... 36

Independent Auditors Report on Internal Control Independent Auditors’ Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards ...37

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CERTIFIED PUBLIC ACCOUNTANTS

501 STATE STREET

POST OFFICE BOX 5949

WEST COLUMBIA, SOUTH CAROLINA 29171

PHONE: (803) 739-3090

FAX: (803) 791-0834

INDEPENDENT AUDITORS’ REPORT Mr. George L. Kennedy, III, CPA

State Auditor

Office of the State Auditor 1401 Main Street, Suite 1200 Columbia, South Carolina 29201 Report on the Financial Statements

We have audited the accompanying financial statements of the business-type activities of the South Carolina Medical Malpractice Patients’ Compensation Fund (the “Fund” or “PCF”), a non-major enterprise fund of the State of South Carolina as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Fund’s basic financial statements as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities of the South Carolina Medical Malpractice Patients’ Compensation Fund, as of June 30, 2017, and the respective changes in financial position, and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Other Matter

As discussed in Note 1, the financial statements present only the South Carolina Medical Malpractice Patients’ Compensation Fund and do not purport to, and do not, present fairly the financial position of the State of South Carolina, as of June 30, 2017, and the changes in its financial position, and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis, Schedule of Proportionate Share of the South Carolina Retirement System Net Pension Liabilities, and Schedule of South Carolina Retirement System Contributions on pages 3–8, 35, and 36, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated August 23, 2017 on our consideration of the Fund’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Fund’s internal control over financial reporting and compliance.

West Columbia, South Carolina August 23, 2017

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Management’s Discussion and Analysis

Overview of the Financial Statement and Financial Analysis

In accordance with Government Accounting Standards, the Fund produces three primary financial statements: (1) The Statement of Net Position, (2) The Statement of Revenues, Expenses and Changes in Net Position, and (3) The Statement of Cash Flows. This management’s discussion and analysis of the South Carolina Patients’ Compensation Fund’s (PCF) financial statements provide an overview of its financial activities for the year.

Statement of Net Position

The Statement of Net Position presents the assets, liabilities and equity of the PCF as of the end of the fiscal year. The Statement of Net Position presents end-of-year data concerning assets as well as liabilities (current and non-current). Our current assets are those, which are reasonably expected to be, realized in one year. Current liabilities are obligations whose liquidation is expected to require the use of current assets.

Condensed Statements of Net Position

June 30,

2017 2016 Variance

Assets and Deferred Outflows of Resources:

Cash and investments $ 9,243,895 $ 6,322,421 $ 2,921,474 Interest receivable and prepaid expenses 367,453 355,589 11,864 Capital assets, net 1,035,491 1,026,570 8,921 Deferred outflows of resources 83,167 40,305 42,862 Total assets and deferred outflows of resources $ 10,730,006 $ 7,744,885 $ 2,985,121

Liabilities and Deferred Inflows of Resources:

Current liabilities $ 9,837,870 $ 6,909,375 $ 2,928,495 Claims payable non current portion 42,496,947 51,607,515 (9,110,568) Pension liability 575,007 513,775 61,232 Deferred inflows of resources 26,106 34,637 (8,531)

Total liabilities and deferred inflows of resources 52,935,930 59,065,302 (6,129,372)

Net Position (Deficit):

Net investment in capital assets 1,035,491 1,026,570 8,921 Unrestricted deficit (43,241,415) (52,346,987) 9,105,572

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Statement of Revenues, Expenses and Changes in Net Position (Deficit)

The purpose of the statement is to present the revenues earned by the PCF, operating and non-operating, and the expenses incurred by the PCF. Non-operating revenues are those for which goods or services are not provided.

The Statement of Revenues, Expenses and Changes in Net Position is prepared on the accrual basis of accounting. Accrual accounting attempts to record the financial effects of transactions of an entity in the period in which those transactions occur, rather than in the period in which cash is received. Revenues are recognized when goods or services are provided. Expenses are recognized when resources are utilized in order to produce goods or services.

Condensed Statement of Revenues, Expenses and Changes in Net Position

Year Ended June 30,

2017 2016 Variance

Operating revenues $ 9,731,142 $ 9,211,255 $ 519,887 Operating expenses ( 577,822) (1,066,874) 489,052 Operating income 9,153,320 8,144,381 1,008,939 Non-operating revenue (expense) (38,827) 158,506 (197,333)

Change in net position 9,114,493 8,302,887 $ 811,606 Net position (deficit) - beginning of year (51,320,417) (59,623,304)

Net position (deficit) - end of year $ (42,205,924) $ (51,320,417)

Statement of Cash Flows

The final statement presented by the PCF is the Statement of Cash Flows. The Statement of Cash Flows presents detailed information about the cash activity during the year. The statement is divided into four parts. The first part deals with operating cash flows and reports the net cash flows from the operating activities of the Fund. The second section reports the cash activity related to financing for capitalized items. The third section reflects cash flows from investing activities and shows the interest received from investing activities. The fourth section reconciles the net cash provided or used by operating activities to the operating income displayed on the Statement of Revenues, Expenses and Changes in Net Position.

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Condensed Statement of Cash Flows

Year Ended June 30,

2017 2016 Variance

Cash provided (used) by:

Operating activities $ 3,110,865 $ (952,410) $ 4,063,275 Capital and related financing activities (129,037) (192,150) 63,113 Investing activities (1,899,160) 1,959,097 (3,858,257) Net change in cash 1,082,668 814,537 268,131 Cash and cash equivalents - beginning of year 1,318,324 503,787 814,537 Cash and cash equivalents - end of year $ 2,400,992 $ 1,318,324 $ 1,082,668

Assessment and Rate Increases

The PCF Board of Governors determined that a membership deficit assessment was not necessary during

this fiscal year. The last membership deficit assessment was in June 2000. The statute grants the Board the authority to make assessments under Section 38-79-450 of the Code of Laws of South Carolina, 1976. The PCF Board continues to maintain that no assessments will be necessary for the continued operation of the Fund.

In February 2017, an actuarial review was conducted for the purpose of determining rates for the 2017-2018 plan year. This review was done at the direction at the South Carolina Department of Insurance and the PCF Board of Governors. The PCF Board of Governors voted and approved an overall 2.5% increase in the rates for the 2017-2018 plan year.

These rate change considerations were based on the actuary’s recommendation and were approved by the PCF Board of Governors. The Board of Governors considered a number of factors in their deliberations including but not limited to claims experience over this fiscal year, competitive place in the commercial market, and a miscellaneous actuarial review while keeping in mind our goal of providing affordable protection for the healthcare providers in the State of South Carolina. This minimal increase in the rates supports the PCF Board’s belief that the PCF’s financial condition continues to improve.

The PCF Board continues to surcharge any licensed healthcare providers who have had issues with regard to their State Board licensing. This surcharge applies where there are issues such as a loss of hospital privileges, criminal activity, sanctions, license revocation or restrictions of the physician’s license to practice medicine. The surcharge will remain with the member for a ten (10) year period and is reduced after five (5) years assuming no additional issues have arisen during this time. An inquiry is made to the State Board of Medical Examiners on each new member who applies to the PCF.

The PCF Board of Governors reviews the surcharge for experience rating. A member is surcharge based on the frequency and amounts of settled claims. The surcharge for experience rating remains with the member for 10 years. A member can be experience rated up to 250% of their base rate.

The PCF uses independent agents to assist in the underwriting of its members. Agency Commissions were increased to 7% this year. The PCF Board believes that the use of independent agents helps to better serve our members. Higher commissions are offered for new and returning members.

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Finally, the PCF Board has given the underwriting staff authority to offer credits up to 40% per membership to reward members for positive membership activity such as claims free, large group size, longevity with the PCF and unusual (positive) risk characteristic in an effort to be more competitive with the medical malpractice market. Underwriting staff are also authorized to use up to 15% charge for negative membership activity. The overall impact to the PCF cannot be more than 10% of the total membership revenue.

Business Overview

The Board of Governors is composed of three physicians, two dentists, two hospital representatives, two insurance representatives, two attorneys, and two representatives of the general public, all appointed by the Governor. The appointed members serve a term of six years. Currently, we are awaiting the replacement of one hospital member.

The Board continues to amend its Plan of Operation and Manual of Rules and Rates for efficient administration of the Fund, consistent with the provisions of the Plan of Operations and Article 5 of the enabling legislation.

The Executive Director is charged with the day-to-day operations of the Fund. Quarterly newsletters are sent to the members/stakeholders providing updates concerning underwriting changes, news, risk management initiatives and spotlights on our members.

The PCF functions with a staff of four full-time equivalent employees. Included is one Administrative Assistant, one Program Coordinator, one Program Manager and the Executive Director. One FTE position remains unfilled which is an administrative assistant position.

At the close of the fiscal year, the PCF had a membership total of 2,686. This includes 44 Clinics and

Hospitals, 148 professional associations, 1,465 physicians, 708 dentists and oral surgeons, 312 Midlevel healthcare providers, 9 full time equivalent positions (shared memberships with 32 physicians). The PCF

paid a total of $4,790,000 for claims, settlements and judgments during the fiscal year. This represents

48% decrease in claims payments made from the prior fiscal year. The PCF collected $9,634,641 in membership fees which constitutes an approximate decrease of 6% from the prior fiscal year.

The PCF is an organization that works extensively with legal counsel for claims defense, expert witnesses, and claims investigations, all in conjunction with the primary carrier. The effective selection, coordination and management of these professionals are critical to the success of the PCF. It requires professionals with special skills and a high work ethic. For all of the PCF claims that went to trial during this fiscal year, 90% of the claims resulted in defense verdicts. This fiscal year continued to show a downward trend in the total number of claims, however, the severity of the claims reported increased minimally. This appears to be in line with the national trend, which continues to show a soft market for Medical Malpractice insurance.

The PCF has maintained our membership numbers in spite of the continuing practice of South Carolina hospitals purchasing physician practices and to competitive pricing by other carriers coming into the state as a result of a soft medical malpractice market. Retirement has played a small part in the total number of cancellation of memberships. These factors, along with the increasing number of members choosing lower PCF limits, increased shared limit options, and increased use of credits on membership account for the decrease in membership fees.

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The Board has engaged in strategic planning efforts throughout the fiscal year, which included the continual review and revision of the PCF Plan of Operations, Underwriting Manual of Rules and Rates and claims handling procedures. The Plan of Operations details procedural information that provides for economic, fair and nondiscriminatory administration and for the prompt and efficient provision of excess medical malpractice insurance. The Plan contains other provisions including, but not limited to, assessment of all members for expenses, deficits, losses, reasonable underwriting standards, acceptance and cession of reinsurance, appointment of servicing carriers, and procedures for determining the amounts of insurance to be provided by the Fund. The Plan of Operations and any amendments to the Plan are subject to the approval of the Board and of the Director of Insurance or his designee. The Board continues to review and consider legislative changes that will allow for the more efficient operation and management of the Fund.

In 2008, the South Carolina Legislature has passed certain measures that have benefited the Fund (S.669). With the passage of S.669 the PCF Board is making significant strides toward stabilizing the Fund by capping its exposure. S.669 clarified the PCF Board’s authority to set limits of coverage. Prior unlimited exposure has resulted in excessively high incurred but not reported statistics. At the end of this fiscal year the PCF memberships consisted of the following limits:

$10 Million per occurrence $12 Million annual aggregate 28%

$5 Million per occurrence $7 Million annual aggregate 8%

$3 Million per occurrence $6 Million annual aggregate 18%

$2 Million per occurrence $4 Million annual aggregate 2%

$1 Million per occurrence $3 Million annual aggregate 44%

Active memberships with unlimited coverage ended with May 1, 2010 renewals.

The Fund provides a high level of customer services to its members through enrollment of new members, renewal of current members, collection of fees and payment of claims. It provides credentialing information to hospitals and managed care organizations. The Fund also provides free Locum Tenens coverage for up to 45 days per year for substitutions for our members.

The Board has authorized the revision of the membership agreement and the development of applications to better serve its members. The Board continues to allow its members to pay their annual membership fee on a quarterly basis, with a small administrative fee.

The PCF website now allows new members to apply on-line for a PCF membership, existing members to pay membership fees, and direct access to renewal information for hospitals and managed care organizations credentialing agents.

Physicians and dentists who attend the South Carolina Medical Association and the South Carolina Dental Association Risk Management Seminar, which is co-sponsored by the JUA, receive a discount in their annual membership fee. The new Dentists discount now includes a 40% discount for first year of practice with a 10% discount for the second year. If new dental graduates attend the Risk Management Seminar held at the MUSC Dental School they will also receive a 25% discount on their first year’s membership fees. It is a one-time discount. The discount does not apply to a physician’s professional association.

The PCF Board of Governors approved a new on-line Risk Management program in partnership with The MRM Group and The South Carolina Joint Underwriters Association. This program provides online modules to our member physicians, oral surgeons & allied healthcare provider. There are three modules

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that when completed will provide our members CME credits at no charge to the members. The first year’s topic is Electronic Health Records. The program began in June. Each provider who completes the online program will receive up to 6% credit on their next year’s PCF renewal fees.

Economic Outlook

The principal challenge facing the PCF is to retain current members and at the same time, adjust membership fees appropriately to reduce the loss reserve liability. The other significant challenge the PCF faces is to manage the claims process effectively and coordinate with the primary carriers for satisfactory resolution of all claims. The PCF’s ultimate goal is to provide medical professionals with effective medical malpractice liability coverage, while ensuring that the PCF is in a sound financial position to pay all of its liabilities. There are no pending judgments on appeal that affect the PCF. Based on actuarial reviews and recommendations, the PCF Board of Governors feels confident that the rates established this fiscal year are appropriate. The PCF continues to rate members for claims experience as well as surcharge members for state licensing issues. New underwriting initiatives have been established to assist in maintaining and improving membership numbers such as discounts based on group size, number of years of continued coverage through the PCF and positive loss experience. Coverage enhancements have also been added which consists of nose coverage for converting a claims-made membership back to an occurrence membership. Step factors for claims-claims-made memberships have been reduced to be more in line with other admitted medical malpractice insurers.

The South Carolina Medical Malpractice Patients’ Compensation Fund shows an overall deficit on its books due to the fact that, since 2002, it has recorded the actuarial liability for unpaid claims as well claims that are “incurred but not reported.” Prior to 2002, the Fund’s accounts did not reflect such reserves operating on a cash basis. Over the past 13 years the PCF Board of Governors has taken steps to reduce the net deficit of the PCF by $181,000,000. As a result, the PCF continues to show an upward trend in its overall financial outlook. During the fiscal year, the PCF met all its financial and legal obligations in a timely manner.

The Fund is not aware of any facts, decisions, or conditions that can reasonably be expected to have a material impact on the Fund’s economic outlook during the fiscal year beginning July 1, 2017.

Contact Information

Questions related to the Management Discussion and Analysis and the accompanying financial statements should be directed to Terry Coston, Executive Director, at (803) 896-5294.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND STATEMENT OF NET POSITION

YEAR ENDED JUNE 30, 2017

Assets and Deferred Outflows of Resources: Current assets:

Cash and cash equivalents $ 2,400,992

Investments 6,842,903

Prepaid expenses 299,424

Interest receivable 68,029

Total current assets 9,611,348

Non-current assets:

Capital assets, net of accumulated amortization 1,035,491

Total non-current assets 1,035,491

Deferred outflows of resources 83,167

Total assets and deferred outflows of resources 10,730,006

Liabilities and Deferred Inflows of Resources: Current liabilities:

Accounts payable 225,000

Accrued liabilities 192,905

Unearned member fees 3,554,965

Current portion of claims payable 5,865,000

Total current liabilities 9,837,870

Other liabilities:

Claims payable, net of discount of $2,688,000 42,496,947

Pension liability 575,007

Total long-term liabilities 43,071,954

Deferred inflows of resources 26,106

Total liabilities and deferred inflows of resources 52,935,930

Net Position (Deficit):

Net investment in capital assets 1,035,491

Unrestricted deficit (43,241,415)

Total net position (deficit) $ (42,205,924)

See accompanying notes.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND STATEMENT OF REVENUE, EXPENSES,

AND CHANGES IN NET POSITION YEAR ENDED JUNE 30, 2017

Operating Revenues:

Membership fees, net of refunds ($190,210) $ 9,634,641

Administrative fees 96,331

Miscellaneous income 170

Total operating revenues 9,731,142

Operating Expenses:

Claims 4,790,000

Change in claims reserves (6,115,568)

Commissions 769,185

Personnel services 367,106

Operating and contractual services 622,849

Supplies and materials 24,134

Amortization 120,116

Total operating expenses 577,822

Operating income 9,153,320

Non-Operating Revenue (Expenses):

Interest income 119,663

Investment account fees (27,870)

Unrealized gain on investment (130,620)

Net non-operating revenue (expense) (38,827)

Change in net position 9,114,493

Net position (deficit), beginning of year (51,320,417)

Net position (deficit), end of year $ (42,205,924)

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND STATEMENT OF CASH FLOWS

YEAR ENDED JUNE 30, 2017

Cash Flows From Operating Activities

Cash received from members $ 9,609,976

Cash payments for claims (4,790,000)

Cash payments for personnel services (370,669)

Cash payments for commissions (776,122)

Cash payments for operating and contractual services (538,186)

Cash payments for suppliers (24,134)

Net cash flows from operating activities 3,110,865

Cash Flows From Capital and Related Financing Activities

Construction of capital asset - software (129,037)

Net cash flows from capital and related financing activities (129,037)

Cash Flows From Investing Activities

Purchase of investments (3,048,356)

Proceeds from sale of investments 1,051,060

Interest and investment income 98,136

Net cash flows from investing activities (1,899,160)

Net change in cash and cash equivalents 1,082,668

Cash and cash equivalents, beginning of year 1,318,324

Cash and cash equivalents, end of year $ 2,400,992

(CONTINUED)

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND STATEMENT OF CASH FLOWS

-CONTINUED-Reconciliation of Operating Income to Net Cash Flows From Operating Activities

Operating income $ 9,153,320

Adjustments to reconcile operating income to net cash flows from operating activities:

Amortization 120,116

Changes in assets and liabilities

Prepaid expenses 9,663 Deferred outflows (42,862) Deferred inflows (8,531) Pension liability 61,232 Accounts payable 75,000 Accrued expenses (20,339)

Unearned member fees (121,166)

Claims payable, net of discounts (6,115,568)

Net cash flows from operating activities $ 3,110,865

Non-cash investing activities:

Net increase in fair value of investments (unrealized gains) $ (130,620)

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017

1. Basis of Presentation and Summary of Significant Accounting Policies

The financial statements of the South Carolina Medical Malpractice Patients’

Compensation Fund (the “Fund”) have been prepared in conformity with accounting

principles generally accepted in the United States of America as applied to enterprise funds of governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The significant accounting principles and policies utilized by the Fund are described below:

Reporting Entity: The South Carolina Medical Malpractice Patients’ Compensation

Fund was established by Section 38-79-420 of the Code of Laws of South Carolina on July 1, 1976. The Fund is part of the primary government of the State of South Carolina and is included in the Comprehensive Annual Financial Report of the State of South Carolina.

The Board of Governors, whose members are appointed by the Governor of the State of South Carolina, is the governing body of the Fund. The Board was created to manage and operate the Fund. The Board has the authority to set annual membership fees and to make deficit assessments when insufficient money is available to pay the Fund’s liabilities. The Board also has the authority to approve and pay claims liabilities and to actively defend the Fund against claims.

The coverage is available to any public or private health care provider in the State. The Fund is responsible for payment of that portion of any covered medical malpractice claim, settlement, or judgment, which is in excess of $100,000 per incident or in excess of $300,000 in the aggregate for one year. Effective November 26, 2000, excess coverage thresholds increased to $200,000 and $600,000. Beginning in 2009, the Fund began eliminating unlimited coverage from its offered limits. Although the reporting entity operates somewhat autonomously, it lacks full corporate powers. The accompanying financial statements present the financial position, results of operations, and cash flows solely of the Fund and do not include any component units or other agencies or funds of the State of South Carolina.

Measurement Focus, Basis of Accounting and Basis of Presentation: The Fund is presented as an enterprise fund of the State of South Carolina. The financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when the liability is incurred or economic asset used. Revenues, expenses, gains, losses, assets and liabilities resulting from exchange and exchange-like transactions are recognized when the exchange takes place.

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-CONTINUED-SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Fund was created by act of the General Assembly for the purpose of providing funds for payment of that portion of any medical malpractice claim, settlement or judgment against a health care provider in accordance with the limits previously

defined. The Fund is liable only for payment of claims against “licensed health care

providers”, which includes physicians and surgeons, directors, officers, and trustees of

hospitals; nurses; oral surgeons; dentists; pharmacists; chiropractors; hospitals; nursing homes; or any similar category of licensed health care providers. All providers licensed in South Carolina are eligible to participate in the Fund upon remitting the annual assessment fees in amounts as determined by the governing board of the Fund. Budget Policy: The Fund is granted an annual appropriation for administrative operating purposes by the General Assembly. The appropriation as enacted becomes the legal operating budget for the Fund for its budgeted activities. The Appropriation Act authorizes expenditures from funds appropriated from the General Fund of the State and expenditures of total funds. None of the funding of the Fund is provided from State General Fund appropriations. The General Assembly enacts the budget through passage of line-item appropriations by program within budgetary unit. Budgetary control is maintained at the line-item level of the budgetary entity. Agencies may process disbursement vouchers in the State’s budgetary accounting system only if enough cash and appropriation authorization exist.

Transfers of funds may be approved by the State Fiscal Accountability Authority under its authority or by the Fund as set forth in the Appropriation Act for fiscal year 2016-2017 as follows: Agencies are authorized to transfer appropriations within programs and within the agency with notification to the Revenue and Fiscal Affairs Office and the State Comptroller General. No such transfer may exceed twenty percent of the program budget. Transfers from personal services accounts or from other operating accounts may be restricted to any level set by the Board.

During the fiscal year-end closeout period in July, agencies may continue to charge vendor, interagency, and inter-fund payments for the fiscal year to that fiscal year’s appropriation. For the Fund, any unexpended funds as of June 30, automatically carry

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

State law does not precisely define the budgetary basis of accounting. The current Appropriation Act states that the General Assembly intends to appropriate all State funds and to authorize and/or appropriate the use of all other monies to operate State

government for the current fiscal year. The State’s annual budget is prepared primarily

on the modified accrual basis of accounting with several exceptions, principally the cash disbursements basis for payroll expenditures.

Cash and Cash Equivalents: The amounts shown in the financial statements as “cash and cash equivalents” represent cash on hand, cash on deposit with the State Treasurer and local financial institutions, and cash invested in various investments by the State Treasurer as part of the State’s internal cash management pool.

Because the State’s internal cash management pool operates as a demand deposit account, amounts invested in the pool are classified as cash and cash equivalents. The pool includes some long-term investments such as obligations of the United States and certain agencies of the United States, obligations of the State of South Carolina and certain agencies of its political subdivisions, certificates of deposit, collateralized repurchase agreements,

and certain corporate bonds. Most State agencies participate in the State’s internal cash

management pool; however, some agency accounts are not included in the pool because of restrictions on the use of funds. For those accounts, cash equivalents included investments in short-term, highly liquid securities having a maturity at the time of purchase of three months or less.

The State’s internal cash management pool consists of a general deposit account and

several special deposit accounts. The State records each agency’s equity interest in the

general deposit account; however, all earnings on that account are credited to the General Fund of the State. Agencies record and report their deposits in the general deposit account at cost. However, agencies report their deposits in the special deposit accounts at fair value. Investments in the pool are recorded at fair value. Interest earned

by the agency’s special deposit accounts is posted to the agencys account at the end of

each month and is retained by the agency. Interest earnings are allocated based on the percentage of an agency’s accumulated daily interest receivable to the total undistributed interest received by the pool. Reported interest income includes interest earnings, realized gains/losses and unrealized gains/losses on investments in the pool arising from changes in fair value. The Fund only has special deposit accounts. Realized gains and losses are allocated daily and are included in the accumulated income receivable. Unrealized gains and losses are allocated at year-end based on the agency’s percentage of ownership in the pool.

(20)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Although the State’s internal cash management pool includes some long-term investments, it operates as a demand deposit account; therefore, for credit risk information pertaining to the internal cash management pool, see the deposits

disclosures in Note 2.

Investments: In accordance with State Law, the Fund may invest in a variety of instruments including obligations of the United States and its agencies and securities fully guaranteed by the United States, certain corporate obligations, certain shares of Federal savings and loan associations and State chartered savings and loan associations, and collateralized repurchase agreements. Within these parameters, the Board of Governors authorizes the investment manager to invest up to 100% in U.S. Treasuries or Agencies, but no more than 40% in Corporate Bonds. No more than 5% of the assets of the Fund may be invested in the securities of any one issuer except securities issued or guaranteed by the U.S. Government or its agencies.

Prepaid Expenses: Prepaid expenses consist of commissions paid to agents in advance upon policy inception and are expensed as policy coverage expires.

Accrued Compensated Absences: Generally all permanent full-time State employees and certain part-time employees scheduled to work at least one-half of the agency’s month are entitled to accrue and carry forward at calendar year-end a maximum of 180 days sick leave and 45 days annual vacation leave. The Fund calculates the gross compensated absences liability based on recorded balances of unused leave. The entire unpaid liability for which the employer expects to compensate employees through paid time off or cash payments, inventoried at fiscal year-end current salary costs and the cost of the salary-related benefit payments, is recorded as a current liability. The net change in the liability is recorded in the current year in the applicable administrative expense categories.

Unpaid Claims Liabilities: The Fund is considered an insurance enterprise which

follows the guidance of Financial Accounting Standards Board (FASB) Accounting

(21)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

The Fund actuarially establishes claims liabilities based on estimates of the ultimate cost of claims that have been reported but not settled, and of claims that have been incurred but not reported. The Fund, because it carries only excess liability coverage, does not incur claim adjustment expenses. The length of time for which claims costs must be estimated varies depending on the coverage involved. Because actual claims costs depend on such complex factors as medical technology, changes in doctrines of legal liability, and damage awards, the process used in computing claims liabilities does not necessarily result in an exact amount. Claims liabilities are recomputed annually using a variety of actuarial and statistical techniques to produce current estimates that reflect recent settlements, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claims costs is implicit in the calculation because reliance is placed both on actual historical data that reflects past inflation and on other factors that are considered to be appropriate modifiers of past experience. An independent actuary performs an actuarial study annually with the latest completed in August 2017 for the current year. Adjustments to claims liabilities are charged or credited to expense in the periods in which they are made. Claims liabilities are discounted based upon the Fund’s payment experience and interest rates on cash equivalents held. The discounted liabilities provide the amount needed, at the date of computation, to fund liabilities that are expected to be paid in future years. Deferred Outflows/Inflows of Resources:

In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element,

deferred outflows of resources, represents a consumption of net position that applies to

a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. The Fund currently reports deferred outflows of resources in the amount of $83,167 as of June 30, 2017.

In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element,

deferred inflows of resources, represents an acquisition of net position that applies to a

future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The Fund currently reports deferred inflows of resources in the amount of $26,106 as of June 30, 2017.

Revenue Recognition: The Fund receives fees from members; the fee pays for coverage for a year. Due to the various effective anniversary dates, a provision for unearned fees at the end of every year is estimated. The fees may be paid annually or quarterly. The computation of unearned fees is based upon the amount of the fees, period of payment, and the effective membership dates for participants. This is done to recognize revenue during the coverage period.

(22)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-1. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

When warranted, the Fund may make deficit assessments, which are recognized as revenue on the date of the assessment.

Due to the nature of the coverage of the members, refunds are often warranted. These occur because of policyholder change of personnel and/or change of information provided by the policyholders relating to employees and their ratings. Refunds are recognized in the year of the refund. These adjustments are taken into consideration in computation of the unearned fees liability.

Operating Revenues and Expenses: Operating revenues and expenses for proprietary funds are those that result from providing services and producing and delivering goods and/or services. It also includes all revenue and expenses not related to capital and related financing, non-capital financing, or investing activities.

Estimates: The preparation of the Fund’s basic financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates by management. Actual results could differ from those estimates. Fair Value: The Fund categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs.

The Fund has the following recurring fair value measurements as of June 30, 2017:

 Investments are valued using quoted market prices (Level 1 inputs).

2. Investments and Deposits

Deposits: State law requires that a bank or savings and loan association receiving State funds must secure the deposits by deposit insurance, surety bonds, collateral securities, or letters of credit to protect the State against loss.

Custodial Credit Risk: Custodial credit risk for deposits is that, in the event of the failure of a depository financial institution, the Fund will not be able to recover collateral securities that are in possession of an outside party. The Fund’s Deposit and Investment policy states that for bank obligations and obligations of savings institutions, deposits shall not exceed the limits of the Federal Deposit Insurance Corporation unless

(23)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-2. Investments and Deposits (Continued)

The carrying amounts of the deposits for the Fund at June 30, 2017 at local financial institutions were $1,893,261. Bank balances were $1,907,008 at June 30, 2017 and insured as follows:

Amount insured by FDIC $ 250,000

Amount collateralized by United States

Government or Agency Securities 1,657,008

Total $ 1,907,008

The remaining deposits of the Fund in the amount of $507,731 at June 30, 2017 consist of deposits held by the State Treasurer ($59,553) and deposits held in an investment account held by a financial institution ($448,178). Please refer to the Comprehensive Annual Financial Report of the State of South Carolina for the deposits held by the State Treasurer.

Foreign Currency Risk: Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment. The Fund does not maintain deposits that are denominated in a currency other than the United States dollar; therefore, the Fund is not exposed to this risk.

Investments: The Fund’s investments that are in the State’s internal cash management pool and operate as a demand deposit are classified as deposits. The deposits are held by the State Treasurer. Please refer to the Comprehensive Annual Financial Report of the State of South Carolina.

As of June 30, 2017, the Fund had the following investments (and maturities) at local financial institutions:

Fair Value

Investment Maturities (in Years)

Les s Than

1 Year 1-5 Years 6-10 Years

Weighted Average Interes t Rate Corporate Bonds $ 2,912,161 $ 789,827 $ 1,664,383 $ 457,951 3.66% Federal Agencies 712,771 - 421,411 291,360 4.36% U.S. Treas uries 3,217,971 993,237 1,749,813 474,921 2.68% Total $ 6,842,903 $ 1,783,064 $ 3,835,607 $ 1,224,232

(24)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-2. Investments and Deposits (Continued)

The Fund invests in various fixed income debt securities such as U.S. treasuries, U.S. government backed mortgage securities, state and municipal bonds, and corporate bonds. These fixed income debt securities are reported at fair value (quoted prices in active markets – level 1 inputs), as required by generally accepted accounting principles. Credit risks for the Funds’ total investments are as follows at June 30, 2017:

S&P Rating Treasury/Agency $ 3,930,742 AAA 406,953 AA 721,561 A 1,783,647 $ 6,842,903

Reconciliation of Cash, Cash Equivalents and Investments: The following schedule reconciles cash, cash equivalents and investments as reported on the Statements of Net Position to footnote disclosures provided for deposits and investments.

Per Notes to Financial S tatements : Carrying value of depos its :

Held by State Treas urer $ 59,553

Other 1,893,261

Money Funds 4 48,178

Carrying value of inves tments :

Corp orate Bonds 2,912,161

Federal A gencies 7 12,771

U.S. Treas uries 3,217,971

Total dis clos ure, depos its and inves tments , plus

reco nciling items $ 9,243,895

Per S tatements of Net Pos ition:

Cas h and Cas h Equivalents $ 2,400,992

Inves tments 6,842,903

(25)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-3. Capital Assets

The following is a schedule of capital asset activity for the year ended June 30, 2017:

July 1, 2016 Incre as e De cre as e June 30, 2017

Software $ 1,136,638 $ 129,037 $ - $ 1,265,675 Less: accumulated (110,068) (120,116) - (230,184) amortization software

$ 1,026,570 $ 8,921 $ - $ 1,035,491

4. Claims Liabilities

Because medical malpractice liability insurance covers claims occurring during the coverage period and claims emerging over a long period of time and because the Fund has limited claims experience history, provisions for estimated losses incurred but not reported and claims reported but not settled are based on an actuarial formula which is used to estimate the ultimate incurred losses. An independent actuary does an actuarial study each year to determine these liabilities. As a result of the actuarial study as of June 30, 2017, net discounted liabilities for claims were $6,115,568 less than those at June 30, 2016.

The actuarial study establishes a low, medium and high range for the estimated net claims

liability. Management’s best judgment is that the low range is the best representation of the

Fund’s net claims liability. The high, medium and low ranges of the actuary’s estimate of

net claims liabilities are as follows at June 30, 2017:

Undis counte d Dis counte d

High $ 58,600,000 $ 55,480,000 Medium 54,825,000 51,921,000 Low 51,049,947 48,361,947

(26)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-4. Claims Liabilities (Continued)

As discussed in Note 1, the Fund establishes a liability for both reported and unreported

insured events, which includes estimates of future payment of losses. The following represents changes in those aggregate liabilities for the year ended June 30, 2017.

Re conciliation of Claims Liabilitie s

Unpaid claims at beginning of the fiscal year $ 54,477,515

Incurred claims:

Provision for insured events of the current fiscal year 6,000,000

Increase (Decreases) in provision for insured

events of prior fiscal years (4,637,568)

Total incurred claims 1,362,432

Payment of claims:

Attributable to events of prior fiscal years (4,790,000)

Unpaid claims at end of the fiscal year 51,049,947

Less: claims discount (2,688,000)

Net claims liabilities $ 48,361,947

5. Long Term Liabilities

The following is a summary of changes in long-term liabilities of the Fund:

Claims , net July 1, 2016 $ 54,477,515 Increas e $ 6,000,000 Decreas e $ (12,115,568) June 30, 2017 $ 48,361,947 Due Within One Year $ 5,865,000

6. Accrued Compensated Absences

The following is a summary of the net changes in accrued compensated absences of the Fund:

Compens ated abs ences

July 1, 2016 $ 23,703 Increas e $ 10,320 Decreas e $ (23,703) June 30, 2017 $ 10,320 Due Within One Year $ 10,320

(27)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-7. Accrued Liabilities

Accrued liabilities consist of the following at June 30, 2017:

Accrued salaries and benefits $ 2 6,513

Accrued compensated absences 10,320

Commissions payable to agents 156,072

$ 192,905

8. Pension Plans

The majority of employees of the Fund are covered by a retirement plan through the South Carolina Retirement System (SCRS), a cost-sharing multiple-employer defined benefit pension plan administered by the Retirement Benefits Division of the South Carolina Public Employee Benefit Authority (PEBA), a public employee retirement system. Generally, all full-time or part-time equivalent State employees in a permanent position are required to participate in and contribute to the SCRS as a condition of employment unless exempted by law as provided in Section 9-1-480 of the South Carolina Code of Laws, as amended, or are eligible and elect to participate in the State Optional Retirement Program (ORP). The SCRS plan provides a life-time monthly retirement annuity benefits to eligible members as well as disability, survivor options, annual benefit adjustments, death benefits, and incidental death benefits to eligible employees and retired members.

The Retirement Division maintains five independent defined benefit plans and issues its own publicly available Comprehensive Annual Financial Report (CAFR) which includes financial statements and required supplementary information. A copy of the separately issued CAFR may be obtained by writing to the South Carolina Public Employee Benefit Authority, P.O. Box 11960, Columbia, South Carolina 29211-1960. Furthermore, the Division and the five pension plans are included in the State of South Carolina’s CAFR.

(28)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-8. Pension Plans (Continued)

Under the SCRS, Class II members are eligible for a full service retirement annuity upon reaching age 65 or completion of 28 years of credited service regardless of age. Employees who first became members of the System after June 30, 2012 are considered Class III members and are eligible for a full service retirement annuity upon reaching age 65 or upon meeting the rule of 90 requirement (i.e., the members age plus the years of service add up to a total of at least 90). The benefit formula for full benefits effective since July 1, 1989 for the SCRS is 1.82 percent of an employee’s average final compensation (AFC) multiplied by the number of years of credited service. For Class II members, AFC is the average annual earnable compensation during 12 consecutive quarters and includes an amount for up to 45 days termination pay at retirement for unused annual leave. For Class III members, AFC is the average annual earnable compensation during 20 consecutive quarters and termination pay for unused annual leave at retirement is not included. Early retirement options with reduced benefits are available as early as age 55 for Class II members and age 60 for Class III members. Class II members are vested for a deferred annuity after five years of earned service. Class III members are vested for a deferred annuity after eight years of earned service. Members qualify for a survivor’s benefit upon completion of 15 years of credited service (five years effective January 1, 2002).

Disability annuity benefits are available to Class II members if they have permanent incapacity to perform regular duties of the member’s job and they have at least 5 years of earned service (this requirement does not apply if the disability is a result of a job related injury). Class III members can apply for disability annuity benefits provided they have a permanent incapacity to perform the regular duties of the member’s job and they have a minimum of eight years of credited service. For disability applications received after December 31, 2013, a member of SCRS will have to be approved for disability benefits from the Social Security Administration in order to be eligible for SCRS disability retirement benefits. An incidental death benefit equal to an employee’s annual rate of compensation is payable upon the death of an active employee with a minimum of one year of credited service or to a working retired contributing member. There is no service requirement for death resulting from actual performance of duties for an active member. For eligible retired members, a lump-sum payment is made to the retiree’s beneficiary of up to $6,000 based on years of service at retirement. TERI participants and retired contributing members are eligible for the increased death benefit equal to their annual salary in lieu of the standard retired member benefit.

Effective January 1, 2001, Section 9-1-2210 of the South Carolina Code of Laws allows employees eligible for service retirement to participate in the Teacher and Employee Retention Incentive (TERI) Program. TERI participants may retire and begin accumulating retirement benefits on a deferred basis without terminating employment for up to five years.

(29)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-8. Pension Plans (Continued)

Upon termination of employment or at the end of the TERI period, whichever is earlier, participants will begin receiving monthly service retirement benefits which will include any cost of living adjustments granted during the TERI period. Because participants are considered retired during the TERI period, they do not earn service credit, and are ineligible to receive group life insurance benefits or disability retirement benefits. The TERI program will end effective June 30, 2018 and a member’s participation may not continue after this date.

Effective July 1, 2016, employees participating in the SCRS were required to contribute 8.66% of all earnable compensation. The employer contribution rate for SCRS was 16.89%. Included in the total SCRS employer contribution rate is a base retirement contribution of 11.41%, .15% for the incidental death benefit program and a 5.33% surcharge that will fund retiree health and dental insurance coverage. The Fund’s actual contributions to the SCRS for the years ended June 30, 2017, 2016, and 2015 were $28,829, $27,738 and $27,945, respectively, and equaled the required retirement contribution rate, including surcharge, of 16.89% for 2017, 16.39% for 2016 and 15.90% for 2015. Also, the Fund paid employer incidental death program contributions of approximately $379, $391 and, $381, at the rate of .15% of compensation for the fiscal years ended June 30, 2017, 2016, and 2015, respectively.

As an alternative to membership in the SCRS, newly hired employees of the Fund may elect to participate in the State Optional Retirement Program (ORP), a defined contribution retirement plan. The Fund did not have any employees participating in the ORP during the 2017, 2016 or 2015 fiscal years.

Article X, Section 16, of the South Carolina Constitution requires that all State-operated retirement systems be funded on a sound actuarial basis. Title 9 of the South Carolina Code of Laws of 1976, as amended, prescribes requirements relating to membership, benefit, and employee/employer contributions for each retirement system. Employee and employer contribution rates to SCRS are actuarially determined.

While the surcharge to fund retiree health and dental insurance benefits is collected by the Retirement Benefits Division of PEBA, it is remitted to the Insurance Benefits Division of PEBA, which is responsible for administration of retiree health and dental insurance benefits and establishment of the applicable retiree insurance surcharge rate.

(30)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-8. Pension Plans (Continued)

At June 30, 2017 the Fund reported $575,007 for its proportionate share of the net pension liabilities of SCRS. The net pension liability defined of the SCRS defined benefit pension plan was determined based on the July 1, 2015 actuarial valuations, using membership data as of July 1, 2015, projected forward to June 30, 2016, and financial information of the pension trust funds as of June 30, 2016, using generally accepted actuarial procedures. The Fund’s portion of the net pension liability was based on the Fund’s share of contributions to the pension plan relative to the contributions of all participating entities. At June 30, 2016, the Fund’s SCRS proportion was 0.002692%. For the year ended June 30, 2017 the fund recognized pension expenses of $54,468 for SCRS.

At June 30, 2017 the state reported deferred outflows of resources and deferred inflows of resources to pensions from the following sources:

De fe rre d Outflows

De fe rre d

Inflows Ne t

Differences between expected and

actual experience $ 5,961 $ (624) $ 5,337

Changes in proportionate share and differences between employer Contributions and proportion share

of total plan employer contributions - (25,482) (25,482)

Net difference between projected and

actual earnings on investments 48,377 - 48,377

Current year employer contributions 28,829 - 28,829

Total $ 83,167 $ (26,106) $ 57,061

Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expenses as follows:

Ye ar e nde d June 30, 2018 Ne t $ (33,205) 2019 (1,260) 2020 (10,324) 2021 (12,272) $ (57,061)

(31)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-8. Pension Plans (Continued)

The total pension liabilities in the July 1, 2015 actuarial valuation was determined using the following actuarial assumptions applied to all periods included in the measurement:

Actuarial Cost Method Entry Age

Actuarial Assumptions:

Investment Rate or Return 7.50%

Projected Salary Increases Levels Off 3.5% to 12.5%

Inflation Rate 2.75%

Benefit Adjustments Lesser of 1% or $500

South Carolina state statute requires that an actuarial experience study be completed at least once in each five-year period. The last experience study was performed on data through June 30, 2015.

The post-retiree mortality assumption is dependent upon the member’s job category and gender. This assumption includes base rates which are automatically adjusted for future improvement in mortality using published Scale AA projected from the year 2000. Assumptions used in the July 1, 2015, valuations for SCRS are as follows:

Former Job Clas s

Educators and Judges

M ale s

RP -2000 Males (with White Collar Adjustment) Multiplied

by 110%

Females

RP-2000 Females (with White Collar Adjustment) Multiplied

by 95% General Employees and

Members of the General Assembly

RP -2000 Males multiplied by 100%

RP -2000 Females multiplied by 90%

P ublic Safety, Firefighters and Members of the South

Carolina National G uard

RP-2000 Males (with Blue Collar adjustment) multiplied

by 115%

RP-2000 Females (with Blue Collar adjustment) multiplied

by 115%

The long-term expected rate of return on pension plan investments for actuarial purposes is based upon the 30-year capital market outlook at the end of the third quarter 2015. The actuarial long-term expected rates of return represent best estimates of arithmetic real rates of return for each major asset class and were developed using a building block approach, primarily based on consensus expectations and market based inputs. Expected returns are net of investment fees.

(32)

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND

NOTES TO FINANCIAL STATEMENTS

-CONTINUED-8. Pension Plans (Continued)

For actuarial purposes, the long-term expected rate of return is calculated by weighting the expected future real rates of return by the target allocation percentage and then adding the actuarial expected inflation which is summarized in the table below. For actuarial purposes, the 7.50 percent assumed annual investment rate of return used in the calculated of the total pension liability includes a 4.75 percent real rate of return and a 2.75 percent inflation component. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:

Asse t Class

Target Asse t Allocation

Expecte d Arithmetic Real Rate of Return

Long Term Expe cted Portfolio Real Rate of Re turn

Global Equity 43.0%

Global Public Equity 34.0% 6.52% 2.22% Private Equity 9.0% 9.30% 0.84% Re al Asse ts 8.0% Real Estate 5.0% 4.32% 0.22% Commodities 3.0% 4.53% 0.13% Opportunistic 20.0% GTAA/Risk Parity 10.0% 3.90% 0.39% HF (Low Beta) 10.0% 3.87% 0.39%

Dive rsifie d Cre dit 17.0%

Mixed Credit 5.0% 3.52% 0.17% Emerging Markets Debt 5.0% 4.91% 0.25% Private Debt 7.0% 4.47% 0.31%

Conservative Fixe d Income 12.0%

Core Fixed Income 10.0% 1.72% 0.17% Cash and Short Duration (Net) 2.0% 0.71% 0.01% Total Expected Real Return 100% 5.10% Inflation for Actuarial Puposes 2.75% Total Expected Nominal Return 7.85%

The projection of cash flows used to determine the discount rate assumed that the funding policy specified in the South Carolina State Code of Laws will remain unchanged in future years. Based on those assumptions, the plans’ fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.

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